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The Southern India Mills’ Association

Committed to Foster the Growth of the Textile Industry

Who picks the tab for higher MSP?

The announcement that the government will move towards declaring Minimum Support Prices (MSPs) 1.5 times the cost of production from the next Kharif season will send a positive signal to the farming community.
At present, MSP is declared for 22 crops across grains, pulses, oilseeds and fibres (cotton and jute).
However, procurement largely takes place only for wheat and rice, and in a sporadic manner for cotton, oilseeds and pulses. Procurement efforts have been historically tardy for maize, jowar and other millets.
Who will procure the crops if MSPs are much higher than the market prices? And, who will pick up the tab? There is uncertainty over this. Budgetary allocations for the massive volume of procurement that would be required if MSPs are to be guaranteed have not been announced.
Higher prices also have a flip side. Apart from being inflationary, higher crop prices at the farm gate could make some industries unviable. A case in point is cotton. Higher input prices could negatively impact the entire textile industry, which employs the largest workforce in the nation — 45 million directly and 60 million indirectly.
If the MSP of cotton is raised from the present level of Rs. 4,230 a quintal (which is close to the current C2 cost of production), by 50 per cent, private buyers may shun the market and put a huge burden on Cotton Corporation of India.
Cost determinant
A major issue of declaring MSP at 1.5 times the cost of production is the determinant of cost. The CACP currently uses the C2 cost of production as the basis. However, the pure basic cost of production (A2+FL) is significantly lower than the current MSPs.
If this basic cost of production alone is considered, the MSP increase may not be significantly higher (not more than 10-15 per cent of the current MSP). If this is what the Centre intends, the Finance Minister has indeed dealt a clever sleight of hand. The announcement of “Operation Green” with a focus on Farmer Produce Organisations (FPOs) is welcome.
FPOs have seen a steady rise in the last few years but have not been able to get the scale required to give farmers better control over pricing. The financial support of Rs. 500 crore to FPOs along with the 100 per cent tax deduction to all FPOs up to a turnover of Rs. 100 crore is, perhaps, one of the few redeeming features of the Budget. There is also recognition of the need to pay attention to improving agriculture infrastructure at APMC warehouses with an announcement of Rs. 2,000 crore for mandi infrastructure. The recognition of the importance of developing the futures/options market is also welcome as the Centre has so far adopted a rather aloof attitude to the derivatives market in agriculture.
Gains from commodity derivatives have also been removed from the speculative category list, which will give a boost to this segment of the market
No major reforms
However, the agri business industry would be somewhat disappointed as no major reforms have been announced that could have enabled private investments to be stepped up.